TOKYO, Jan 8 Key Japanese policymakers played
down the prospect of making the Bank of Japan responsible for
stable employment like the U.S. Federal Reserve, but said a 2
percent inflation target will be at the heart of a new policy
accord with the central bank.

The country's economics and finance ministers dismissed a
newspaper report earlier on Tuesday that stable job growth would
be part of a new BOJ mandate as Prime Minister Shinzo Abe pushes
for a more aggressive monetary policy.

Abe led his Liberal Democratic Party (LDP) to a sweeping
election victory last month with pledges to end nearly 15 years
of deflation with unlimited monetary easing and big fiscal
spending.

The government is rushing this month to complete a new
policy accord with the BOJ and an economic stimulus package that
will be the first test of whether Abe can deliver on his
ambitious economic agenda.

"The prime minister has been saying for some time now that
he wants a price stability goal of around 2 percent inflation,"
Economics Minister Akira Amari told a news conference on
Tuesday, when asked about the newspaper report.

"Price targeting will be the focus of any policy statement
between the government and the BOJ."

The idea is likely among the several now being floated among
central bankers, finance ministry bureaucrats, and politicians
keen to show off their determination to drive Japan's economy
out of the doldrums.

A final decision is expected to be made at the BOJ's next
policy rate review on Jan. 21-22, when the central bank will
debate setting a higher inflation target than the current 1
percent.

Since taking power, Abe and senior LDP politicians have kept
up their pressure on the BOJ, but they have backed away from
some of their more radical demands partly because the central
bank pledged to review its price target in January.

Finance Minister Taro Aso said on Tuesday that the
government is keen to issue a joint policy statement with the
BOJ but cast doubt on using employment as a metric to guide
monetary policy.

"I don't know if the BOJ would swallow that," Aso said when
asked about including employment stability in policy accord.

"Where else in the world has employment (as a policy
objective)? As far as I know it's only the Fed. Therefore, doing
it with the BOJ at this stage seems to be difficult both
physically and time-wise."

NO DEADLINE FOR TARGET

Abe has called for adding job growth to the central bank's
mandate. But doing so would be troublesome, because it will
require a revision to the current BOJ law, which only mandates
it to achieve price stability, and may take time because of
opposition from a BOJ wary of political threats to its
independence.

The BOJ will likely consider setting a new 2 percent
inflation target this month in response to Abe's calls, although
some in the bank are hesitant of setting such a goal without
clear means to achieve it, particularly in a country that has
been mired in deflation for more than a decade.

Many central bankers also want to retain their independence
in deciding on a price goal and the means for achieving it.

Any policy accord is thus unlikely to set a deadline for
meeting the target or mention specific measures for achieving
it, to leave the BOJ with some flexibility in guiding monetary
policy, sources familiar with the negotiations said.

"Japan cannot achieve 2 percent inflation with monetary
policy alone. That's obvious," one of the sources said on
condition of anonymity due to the sensitivity of the matter.

On the fiscal policy front, the cabinet will approve a 13.1
trillion yen ($149 billion) extra budget on Jan. 15, which will
include 10.3 trillion yen for economic stimulus and around 2.6
trillion yen to cover a shortfall in the pension system, sources
told Reuters on Tuesday.

The stimulus will focus on encouraging research into new
technologies, investment in renewable energy, and repairing some
ageing roads and bridges.

The government will also map out a long-term strategy to
boost Japan's growth potential around the middle of this year.

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